When Standard & Poor's Equity Research downgraded the shares of Google Inc. (Nasdaq: GOOG) from "Buy" to "Sell" last week - and slashed its target price for Google shares from $700 to $500 - we were blunt in stating that the ratings agency had blown the call.
Looks like S&P must've heard us.
On Monday, just three days after downgrading Google, S&P did an almost-total about-face on its much-debated call - and upgraded Google shares from "Sell" to "Hold." Frankly, these ratings firms seem determined to operate in a flawed manner - the S&P/"Sell Google" saga only underscores what we've been saying since 2007, when Money Morning warned readers that these firms failed to warn us about the subprime-mortgage disaster. (Don't forget, it was another unit of S&P that downgraded U.S. debt earlier this month. That downgrade, to be really credible, should have been announced several years ago, during the height of the global financial crisis.)
For a market call like S&P's "Sell Google" to be useful, it needs to be well thought out, and predictive in its focus (ahead of the curve). And it needs to provide investors with a long-term outlook.
"Sell" ratings - arguably the most aggressive of any call an analyst can make - are instituted much too infrequently on Wall Street. But hammering a stock with a "Sell" rating - and only days later lifting it to a "Hold" - achieves none of the afore-mentioned goals.
The only thing that this "Sell Google" affair has accomplished is to whipsaw investors - and create confusion.
S&P had downgraded Google to "Sell" after the No. 1 Internet-search giant stunned the markets with its Aug. 15 announcement that it would buy Motorola Mobility Holdings Inc. (NYSE: MMI) for $12.5 billion.
The ratings firm said the acquisition was likely to "negatively impact" Google's growth - and hit Google with the only "Sell" rating among the four dozenanalysts tracked by Thomson Reuters I/B/E/S.
Google shares closed at $563.77 on the final trading day before the Motorola deal was announced - and skidded more than 10% in the days that followed, closing Friday at $490.92 each. The Dow Jones Industrial Average dropped about 3% during the same period, Reuters reported.
Scott Kessler, the head of technology sector equity research at S&P, told Reuters that the sell-off that hit Google shares following the deal announcement took the stock down below the $500 target that he established when he downgraded it. Though he agreed that it was unusual to see a stock's recommendation change that quickly, the sell-off all but forced the upgrade, he said.
"It's very hard for us to say sell this stock when it's trading below its target price," Kessler told Reuters on Monday.
However, the ratings change does not eradicate the concerns that S&P has about the Motorola deal, he said.
Barnes, a retired hedge-fund manager who also writes our popular "Buy, Sell or Hold" features, has a very different view of Google's long-term outlook: He says the Motorola deal will enable Google to unlock more of its potential, enabling the company to become an even bigger part of our everyday lives as consumers.
That's why Barnes rated Google as a "Buy" in his Aug. 16 "Buy, Sell or Hold" special report in Money Morning.
"When the company announced its plan to buy Motorola Mobility Holdings, Google forced me to make a statement that I honestly thought I'd never make - that "It's time to buy Google'," Barnes said in an interview.
According to Thomson Reuters data (which doesn't include S&P research), Wall Street ratings on Google currently consist of 14 "Strong Buys," 20 "Buys," and five "Holds."
Google shares closed yesterday (Tuesday) at $517.20, up $19.03 each , or 3.82%.
As for S&P, the agency announced Tuesday they are replacing President Deven Sharma with Citibank NA Chief Operating Officer Douglas Peterson. Barnes said flawed actions like the "Sell Google" call and the U.S. credit rating downgrade would likely lead to more personnel changes.
"They are not a political rating agency, and I believe they are going to experience a lesson in the difference before this is over," said Barnes. "I expect the upper management of S&P will continue to leave."
To access Money Morning's "Buy, Sell or Hold" special report on Google, please just click here. The report is available free of charge.
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